Is It Finally Time To Refinance?

During the past few years, mortgage
interest rates have continued to flirt with historic lows, and Freddie Mac (the
government-sponsored Federal Home Loan Mortgage Corporation) announced that
during the week ending October 6, 2011, the average rate for a 30-year loan
dropped to 3.94%, the lowest rate ever according to the National Bureau of
Economic Research. Meanwhile, the average rate for 15-year fixed mortgages dipped
to 3.26%—also a record low.

It appears that loans at rates hovering
around the 4% mark, or even lower, should be available for at least the short
term. So that begs the question: If you haven’t refinanced your mortgage yet,
why not? The answer is that there’s more to refinancing than just low interest
rates.

Deciding whether to refinance is all
about finding your break-even point—the time when you’ll actually begin to save
money after taking into account all relevant factors, including tax
ramifications, the fees you pay to refinance, and the difference in monthly
mortgage payments. If you’ll hit the break-even mark during the time you expect
to be in your home, refinancing probably makes sense.

How do you determine the break-even
point? Online calculators are plentiful, but some may leave out crucial
factors. To make sure you’re taking everything into account, do your own
arithmetic using these five steps.

1. Add up the refinancing expenses. This may include fees for attorneys,
loan application and origination, home appraisal and inspection, deed
recording, title insurance, credit reports, and any “points” you pay to obtain
a favorable rate.

3. Calculate the tax cost of
refinancing by multiplying the monthly savings amount by your combined federal
and state income tax rate. Generally, mortgage interest is deductible on your federal return,
so if your interest costs drop, so will your deduction.

5. Divide the cost of refinancing by
the net savings to find the number of months it will take to pay off the
refinancing expenses. This is your break-even point.

For example, if your cost is $5,000 and your net savings is $1,000, it
will take only five months to break even. Unless you’re planning an immediate
move, refinancing makes sense. However, if your cost is $10,000 and your
monthly savings is only $250, it will take 40 months—more than three years—for
refinancing to pay off. That may be a tougher call. If you have questions about
whether it’s finally time to refinance, we can help you crunch the numbers and
consider the impact of such a move on your overall financial situation.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.